RBI to auction Cash Management Bills (CMBs) to control liquidity

Taking further measures to control the liquidity in order to boost the position of rupee which has been on a decline for past some time, the RBI has decided to auction short-term Cash Management Bills (CMBs) for an amount of Rs. 22,000 crore every Monday. RBI will be selling Rs.11,000 crore each in two CMBs maturing in 35 and 34 days on Monday and Tuesday, respectively. The bills will mature on 17 September, 2013, when banking system liquidity gets strained on account of advance tax outflow. The auctions will be conducted using “Multiple Price Auction” method and the Cash Management Bills will have the generic character of Treasury Bills.

What are Cash Management Bills?

CMBs are short-term paper with the flexibility of fixing tenure according to the requirement of the government. The basic difference between a treasury bill and a CMB is that the former has fixed tenure of 30, 91, 182 and 364 days, while a CMB can be anything between seven days and one year. CMBs can be structured in such a way that they are redeemed at that time to infuse liquidity but treasury bills do not offer that flexibility.

Why the RBI is auctioning CMBs (Cash Management Bills)?

Past few months have brought some serious depreciation in the value of rupee against the dollar with rupee crossing the 6o mark versus dollar. The country is also facing the problem of inflation. RBI has been taking liquidity tightening measures to curb the instability of the currency.As part of its liquidity tightening measures, on 15 July, RBI said banks can borrow up to Rs.75,000 crore of money from it at 7.25%. Any excess of it shall be borrowed at a special rate called Marginal Standing Facility (MSF), which it raised to 10.25% from 8.25%.

However, the rupee continued to fall and RBI, on July 23, further restricted this liquidity to 0.5% of a bank’s own demand base. This effectively halved the money a bank can borrow from RBI to Rs.37,500 crore. It also directed banks to keep 99% of their cash reserve ratio, or the portion of deposit that banks need to keep with RBI on a daily basis.

The central bank has clarified that it gives priority to contain rupee-volatility and it chooses to curb inflation over growth. The latest measure of auctioning CMBs is aimed at absorbing the excess liquidity from the economy even as demand for such short-term bills is high. This is expected to bring some positive effect in terms of improving the position of Rupee as well as some impact on inflation.